If you've followed Bitcoin over the last twelve months - it's been a wild ride. Like any great saga, there have been twists, turns, high highs and low lows. The end of last year saw Bitcoin's valuation soar from $900 to nearly $20,000 in an ascent that had people scrambling to jump in on the action, and making those who had invested early on feel gleeful about their returns.
A lot has been written when it comes to millennials and investing. And when it comes to the Bitcoin craze, millennials have undeniably driven demand for cryptocurrency with a third anticipated to be invested in some form of crypto by the end of 2018.
But for many millennials, placing money on Bitcoin is their first exposure to investing and can provide a false sense of security when it comes to understanding market returns, volatility and behaviour.
So if you've suddenly found yourself sitting on some Bitcoin that's gone up in value, or are thinking about jumping in late to the game, here are six things to remember when investing in crypto any why selling is your best bet in the long run:
Sell your Bitcoin over time
If you're wondering if the time is right to sell — the best advice is not to wonder that at all. The smartest thing you can do for the long-term is: never try to time the market. No one can predict what is going to happen with Bitcoin but to mitigate risk, you should always only have money you're willing to lose placed on speculative investments (like crypto).
So if you've made a tidy little profit, it's time to start transferring your winnings off the table and putting them in less speculative investments like a diversified portfolio of low-fee passive funds. And unlike investing in crypto, with passive funds you'll have exposure to the market and own a broad selection of funds - meaning you aren't putting all your eggs in one basket.
Even if Bitcoin goes back up, people may loose their shirts.
This is true of all investments. It's human nature to panic when we see our money going down. We saw this in 2008 when panic-selling lost a lot of people a ton of money, and saved those who were wise enough to drown out the noise and stay committed to their long-term investment plan.
For Bitcoin the same is true. Even if it bounces back and continues to rise over the coming years, many of the retail investors currently buying it won't enjoy its success. Because, like any investment, there will be downturns along the way and investors will act with emotion. When a large dip happens, a lot of people who simply bought because Bitcoin was on the rise will lose their courage and sell out their holdings.
Best way to counter panic-selling? Don't try to time the market and instead set up regular, automatic contributions to your investment accounts. This will allow you to avoid the temptation to invest when markets are high and pull back when they are low, and instead help you keep focused on the long term.
Remember the taxes on your earnings.
In the UK, gains and losses from buying and selling Bitcoin are considered capital gains (or losses). That means if you make a profit when you sell your stake, you'll pay taxes (18% or 28% depending on your personal tax rate). But in some cases, if you buy and sell quite a bit of bitcoin, the government can consider your profits to be business or trading income — and not capital gains. Then those profits will be taxed at the same rate as the rest of your income.
If you're unsure what the tax treatment is, it's time to head to a tax professional. It's also time to consider placing your hard-earned money in a tax-sheltered account like an ISA (Individual Savings Account). ISAs allow you to save up to £20,000 annually, without getting taxed on your money or any resulting capital gains.
Have (some) fun! But follow the 5% rule.
If you want to stay invested in Bitcoin — because you think it's going to increase in value or because you just want to hedge against extreme fear of missing out — we'd give you the same advice we give clients for all types of risky investments: have no more than 5% of your entire investment portfolios in speculative investments. Think of it as play money. You'll feel good if the ascent continues but won't suffer catastrophically - and have to re-mortgage your house - if it crashes.
Remember to rebalance your portfolio.
Rebalancing is one of the most important habits when it comes to investing. In a nutshell, rebalancing makes sure that you are spreading your risk out equally among all the assets in your portfolio, and moving your money between your investments so you can maintain a balance that will help you achieve your financial goals.
For instance, if you'd bet 5% of your portfolio on Bitcoin three years ago, you'd have done quite well. But that investment now represents a much greater percentage of your overall portfolio. Which means you'll need to make sure you maintain a good level of diversification by shifting it to other investments in your portfolio.
It sounds so easy but it's often the hardest rule to focus on when it comes to investing. The best advice for people who are investing in the long term is that what happens now shouldn't really matter for you. It's what the longer-term trend line looks like that matters. And the long-term trend line for all markets since forever has been up.
It's harder to wrap our heads around long term when it comes to bitcoin as no one really knows what will happen. But that's where the 5% rule comes in - as a rule of thumb only keep 5% of your overall assets in speculative investments and you can rest assured you're setting your future self up for success.